Hello everyone,

Welcome to the 110th edition of The Pattern, a weekly newsletter where we delve into the latest from the world of finance, economy, and technology. Let’s get started.

RBI rings in early Diwali for the government

Oscar Wilde once wrote that the cynic “knows the price of everything and the value of nothing.” Here, the literary genius was referring to his disdain for folks who judge things by their cost rather than their importance (aka value). Turns out, he wasn’t too far off the mark.

Just look at the current state of India’s financial sector. This week, the RBI announced a dividend payout of a whopping Rs 2.1 lakh crore to the central government from its surplus. This is 141% higher than the figure last year and it’s a welcome windfall – one that’s more than Rs 1 lakh crore higher than what the government itself budgeted this year. Hoorah!

This is not just good news but one that gives a bit of breathing room to the government to potentially cut its fiscal deficit in the coming year. However, it could also go the other way and reduce personal taxes instead – Fin Twitter seems to want that.

But, the situation isn’t as simple as just dialling down rates and giving citizens a tax sop. The windfall funds, while welcome, are non-revenue items in the government budgeting. This means that it’s not likely to be a repeatable event and the government would do well to think of the revenue side of things too and find ways to reduce the revenue deficit as well, said Swaminathan Aiyar, Consulting Editor, ET Now.

“Therefore, it means that the revenue deficit continues to be very substantial, even if she [Finance Minister] reaches the fiscal deficit target. And I think this will not be repeatable in subsequent years. If it is not repeatable, then I do not know how she is going to make the transition the subsequent year from 5.1% to 4.5,” Aiyar said .

While it remains to be seen exactly which path the policymakers pick to utilize this extra money, it’s amply clear that India’s central bank is not only being prudent about transferring excess funds but also managing the risk side firmly. The RBI has increased its reserve buffer to ensure it has enough firepower if there’s torment in the markets anytime soon – a non-impossible scenario considering the excess volatility observed in election years.

The cost of equality

Meanwhile, the recent RBI circular about introducing more transparency and equity in digital lending platforms has caused a furore in the sector. The recent circular, which suggests that loan aggregators must present all loan offers to borrower without bias. This means that loan aggregators cannot prioritise a certain lender/offer over the other.

While it seems like a prudent move to improve transparency, loan aggregators could lose a fair amount of revenue they might otherwise make from lenders in the form of commissions for preferred funnelling. At the same time, this also means that any kind of intelligent prioritisation on the basis of a lender’s preference for a certain pool of borrower could also now be in question.

“There is a risk-sharing element involved with each loan based on FLDG arrangement and, hence, we use tech to filter quality borrowers. The proposed rules are great for transparency but it will cripple the business of LSPs, which are still growing,” the founder of a prominent app in the space told Moneycontrol.

As a result, companies are now huddled up to figure out a common stance on this move and hoping to get a chance to represent the same to the RBI and work out a middle-ground with the regulator that doesn’t dampen their business while ensuring transparency and consumer protection.

It’s not clear whether the RBI will relent and by how much but it’s clear as the day that a fine balance between business interests and consumer protection must be found if the fintech sector has to continue growing the way it has been in recent years.

That’s all from me today. As always, leaving some reading recommendations below.

Reading list

1. IFSC regulator looking to allow NBFCs operate as risk aggregators

2. RBI’s huge surplus transfer: Largesse in need of an explanation

3. Over 1.8 million SIM cards to be deactivated to combat cyber thieves

4. How ensuring data privacy compliance will bolster fintech credibility

5. Jio Financial looking to enter device leasing business

Thank you for reading. If you liked this edition, forward it to your friends, peers, and colleagues. You can also connect with me on Twitter here and follow FinBox on LinkedIn to always get all updates.

Cheers,

Mayank